Commercial property investment in Europe set to continue with positive yields in 2017

Investing in commercial real estate in Europe is set to continue to produce positive yields in 2017 although there are risks ahead, particularly with Brexit in the UK, a new report suggests.

Overall, European real estate markets have delivered strong returns in recent years and, although the cycle is maturing, it is far from over, according to the report from investment firm Fidelity International.

It says that the European Central Bank’s quantitative easing programme continues to encourage a transfer of capital from the periphery to the core Eurozone, and this capital is chasing high quality real assets in core Europe, especially Germany.

Attractive exchange rates versus the euro are set to draw in cross regional investors from Asia, the Middle East and North America, according to Neil Cable, Fidelity International’s head of European real estate and only macro shocks in their home markets would destabilise these flows.

He explained that in the strongest markets of Europe, especially Germany, values have been steadily increasing for the past couple of years, and this is likely to continue well into 2017.

“Real estate fundamentals are expected to remain positive, and while QE is in place, we believe the weight of capital will extend the European, excluding the UK, investment cycle. We expect capital growth from yield compression in core Eurozone to continue, albeit at a slower pace, with prime yields likely to fall to a new accepted threshold of around 3%,” said Cable.

“Core, supply constrained market segments will continue to see rental growth, which should surprise on the upside as most markets report vacancy rates notably below their long term levels. We are projecting market-level total returns of around 8% to 10% for core Eurozone in 2017,” he added.

The report points out that although European office yields edged down to 4% towards the end of 2016, reflecting the lower for even longer interest environment, they remain surprisingly high.

“This is good news for yield hungry investors, but while capturing 4% to 4.5% yields is possible, it is not straightforward. This is the point of the cycle where the unsuspecting can encounter unwelcome risks, even when investing in seemingly safe or low risk property,’ Cable pointed out.

“As we approach 2017, investors should retrain their focus on the underlying income in their property investments, understand the quality of the tenant companies paying the rents, and ensure good diversity of lease length and tenant type. At this point in the cycle, the chief attraction of real assets is sustainable, high quality cash flow,” he said.

His advice is to try to avoid the hottest markets, some of which are already priced at yields of around 3% and already up to 50% more expensive than average prime property. “Quality yields are available outside of prime markets and now is the time to lock in to those yields,” he added.

Cable believes that if sufficient care is taken, and unnecessary risks are avoided, a good property portfolio will see investors through the next cycle, while delivering a steady and attractive income.